A “Leftist Populist” Is About To Become President Of Mexico: Full Elections Preview

Mexico – where over 100 politicians have been killed in the past year – will hold its general election on July 1, electing a new president, 128 members of the Senate and 500 members of Congress, while local elections will also be taking place in 30 of 32 Mexican states. Recent polling overwhelmingly suggests that the Latin American country will be the latest domino to fall to the global anti-establishment wave, and will elect its first “leftist populist” – some say socialist president – in a generation with potentially far-reaching consequences for the country’s oil industry, trade policy, crime fighting and relations with the United States.

Here are the main highlights of what to look for tomorrow courtesy of RanSquawk:

Presidential race is widely expected to be won by Andrés Manuel López Obrador of the MORENA party

Key battle grounds expected to be in the Lower House and Senate

Relief rally in MXN expected should a “pragmatist” tone be struck, otherwise probabilities for a “post-election sell off [are] high” according to Wall Street analysts

The Preliminary election result program (PREP) begins reporting vote counting at 2100EST/0200BST, with updates every 20 minutes, and preliminary results expected about midnight EST. Conteo Rápido will be providing estimates throughout the day of voting, based on a sample of 7,700 houses. Legally recognised results are not confirmed until the 4th July when the official computing takes place.

VOTING SYSTEM

Presidential candidates in Mexico follow a “relative majority” system for seats, wherein the winning candidate is the one who polls more than other candidates within the voting (Note: doesn’t necessarily implicate a majority). Two systems are used for congressional elections, where 300 members of congress in single-member constituencies are elected through a “first past the post” voting system, with the remaining 200 elected through proportion representation. Senate members are also elected through 2 different systems, with 96 members of 32 3-seat constituencies based on state elections, and the remaining 32 are elected through proportional representation.

COALITIONS & CANDIDATES

Andrés Manuel López Obrador – Juntos Haremos Historia (MORENA, PT & PES) – Andrés Manuel López Obrador (AMLO) has run on a populist platform of economic reform that has been underlined by a desire to freeze prices of gasoline in Mexico for 3 years, as well as a reduction of external investment in the energy sector. He has also suggested an increased level of social spending that will be funded by increased debt issuance.

NOTE: AMLO is also known to be a “flip-flopper” on policy, with regular policy stance changes throughout his campaign. The coalition formed exemplifies this, as it is comprised with the PES party that has stated the alliance is “strictly electoral” and they are likely to vote differently to AMLO’s MORENA party in the future as “[their] convictions are different from [MORENA’s]”.

AMLO ran for president in 2006 and 2012 but lost both elections, first to Felipe Calderon, then to Enrique Pena Nieto on both occasions by slim margins. This year, Lopez Obrador hopes to ride the wave of anti-government anger over corruption, rising violence and tepid economic growth.

José Antonio Meade – Todos por México (PRI, PVEM & Nueva Alianza) – Meade will be the candidate of the most economically favourable coalition Todos por México, with centrists PRI the most popular party within the coalition. Meade will be replacing the incumbent President Nieto, and the party has been judged to be a market positive as it offers fiscal continuity to a growing economy.

Ricardo Anaya – Por México al Frente (PAN, PRD & MC) – Anaya will head the Por México al Frente coalition and is the current President of the PAN party. The right leaning PAN party is an advocate for privatisation and advocates free enterprise and thus free trade agreements (market positive for the NAFTA deal).

Considering the widely expected victory for AMLO in the Presidential race, with most polls suggesting the left-wing candidate will have a double-digit lead over his competitors, the main battle ground will be the Lower House and Senate. ABN AMRO and Barclays have both set their expectations >80% for the Lower house to be led by Juntos Haremos Historia.

The senate race will be the most disputed, with both ABN AMRO and Barclays expecting AMLO’s coalition not attaining a simple majority, with Barclays saying: “this chamber would become the main institutional balance against potential radical changes. For example, the Senate needs to approve the indebtedness ceiling, all the laws and appointments.”

At the moment, MORENA leads the Senate race in 20 out of 32 states and is in second place in five states. Should they win in 24 states, come in second place in 4, and AMLO wins with 45% of total votes, they will have 70 seats in senate out of a possible 128. Whilst this will be the least market friendly possibility as it will allow for a more conciliatory sitting in the senate with a simple majority. ING have stated that the 2/3rd majority required to pass reform with resistance is an unlikely possibility, however, with the MORENA government likely having to rely on defections and other left-leaning parties to pass legislation.

MARKET IMPLICATIONS

ING have suggested that if AMLO takes control of both the presidential seat and majorities in both houses by a large margin, the current sell off being seen in Mexican assets could deepen. This is associated with fears on lowering checks on increased spending. Whilst this may provide a short-term boost to growth this will likely be mitigated by potentially increased interest rates after a faltering budget picture post-increased social spending with debt issuance, as according to Christopher Dhanraj of BlackRock. Alongside this he has highlighted negative potential effects for inflation.

A dampener may have been put on these worries, however, with AMLO’s recent commentary suggesting that spending will be maintained at current levels, as well as supporting a free-floating MXN and work towards a NAFTA deal.

Significant concerns have been expressed about possible barriers to entry in the Mexican energy sector with suggestions that private investment could be halted, and subsidies increased in gasoline (as well as food). This has the intention of freezing gasoline prices for “3 years” post-election, but has found opposition from Mexico’s Energy Minister, whom has said that a better method must be found to avoid price spikes.

Due to this, short-term focus has been placed on AMLO’s commentary post-election with Barclays expecting a “pragmatic” AMLO initially so as to “to avoid facing unnecessary pressure from markets”. Should this possibility materialise SocGen expect a “relief rally” to ensue for the MXN on the short term, otherwise ING state that probabilities for a “post-election sell off [are] high”.

NAFTA is often stated as the main medium/long-term focus, with Aberdeen Asset Management’s Stanners expecting USD/MXN to go past 22.0000 should Trump pull-out of NAFTA, but with the potential for a move toward 17.0000 should the AMLO Government have a more moderate tilt and manage a successful NAFTA renegotiation.